UK: US/UK Dual Qualified Charities

US citizens (and other individuals subject to US income tax) who
are resident in the UK, may be subject to tax in either the US or
the UK when they make contributions to charity unless the charity
is dual qualified. The problem arises because the US income tax
charitable deduction is only available for gifts to charities
organised under the laws of the US, whilst UK tax relief is only
available for contributions made to charities established in
England and Wales and governed by English law.

This means that a donation made to a US charity supporting an
English charity will not qualify for UK gift aid, nor will a US
individual's contribution to an English charity supporting a US
charity qualify for a US income tax charitable deduction (unless it
is dual qualified).

To remedy this problem and ensure that the same charitable gift
qualifies for tax benefits in both countries, the following
structure has been developed. A US charitable company, which is an
exempt organisation under IRS code sections 501(c)(3) and 170(c)
should establish an English charitable company. The English charity
would be organised as a company limited by shares, rather than by
guarantee, although its constitution will still contain the usual
profit distribution prohibitions. The constitution will therefore
contain the same restrictions as a standard charitable guarantee
company, except that it will have paid up share capital of, say,
Ł100. These shares will be owned by the US charitable
company.

For US tax purposes only, the US charity may elect for the
English charity to be treated as a "disregarded entity".
This means that the English charity will, for US tax purposes,
function as a branch of the US charity. For all English law
purposes, and for UK tax purposes, the English charity will be a
separate, independent entity, and will therefore qualify for gift
aid. For US corporate (rather than tax) purposes, the US charity
and the English charity will be regarded as completely separate
entities.

The effect of this is that a US donor of a charitable gift to
the English charity will be treated as having made a qualifying
gift for gift aid purposes. The English charity can make a claim
for the repayment of the basic rate of tax associated with the gift
(i.e. gift aid) and the donor can claim higher rate tax relief. The
same gift will, for US tax purposes, be treated as made to an
overseas bank account of the US charity. This will therefore
qualify for US tax relief because the US charity could provide a
tax receipt to substantiate the deduction for the donor.

In practice, the arrangement should work smoothly and has been
implemented by a number of organisations including the Charities
Aid Foundation.

Administration of a dual qualified charity

The key to the success of the dual qualified charitable
structure is independence. The English charity must operate
independently of its US parent at all times and must have the final
decision regarding grants and expenditure. For these purposes, it
would be helpful if the majority of the English charity's
directors are UK resident and it should be administered from within
the UK. Conversely, the majority of the US parent's directors
must not be UK resident for, although the English company is
transparent for US tax purposes, the US entity is not registered
with the Charity Commission and could therefore be subject to UK
tax on all its income if it were to become UK resident.

In terms of grant making, the directors of the English charity
should resolve, in their discretion, to distribute the funds raised
by the dual qualified structure to a charity of their choice,
provided that the recipient qualifies for a grant under the laws of
England and Wales, the laws of the United States and the laws of
the state in which the US company is incorporated. This should not
represent too much of a problem because of the similarity between
US and English charity law.

This structure should still work even if the US charity is
classified as a private foundation. However, private foundations
are subject to additional restrictions both in the manner in which
they are allowed to operate and the extent of the US tax deduction
permitted to the donor.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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